[Federal Register Volume 62, Number 73 (Wednesday, April 16, 1997)]
[Rules and Regulations]
[Pages 18514-18515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-9713]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-38490; File No. S7-30-95]
RIN 3235-AG66
Order Execution Obligations
AGENCY: Securities and Exchange Commission.
ACTION: Revised compliance dates; exemptive order.
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SUMMARY: The Securities and Exchange Commission (``Commission''') is
announcing the revised phase-in schedule for compliance with Rules
11Ac1-1(c)(5) (``ECN Amendment'' of the ``Quote Rule'') and 11Ac1-4
(``Limit Order Display Rule'') under the Securities Exchange Act of
1934 (``Exchange Act'') and is providing exemptive relief to accomodate
the new schedule. In addition, the Commission is providing exemptive
relief from compliance with the 1% requirement of the Quote Rule with
respect to non-19c-3 securities.
DATES: Effective: April 9, 1997. Compliance Dates: The phase-in
schedule with respect to 550 additional Nasdaq securities will be as
follows: 50 Nasdaq securities on April 21, 1997; 50 Nasdaq securities
on April 28, 1997; 50 Nasdaq securities on May 5, 1997; 50 Nasdaq
securities on May 12, 1997; 50 Nasdaq securities on May 19, 1997; 50
Nasdaq securities on May 27, 1997; 50 Nasdaq securities on June 2,
1997; 50 Nasdaq securities on June 9, 1997; 50 Nasdaq securities on
June 23, 1997; 50 Nasdaq securities on June 30, 1997; and 50 Nasdaq
securities on July 7, 1997. Concurrently, the Commission is exempting
responsible brokers and dealers, electronic communications networks,
exchanges and associations from compliance with the Order Execution
Rules, with respect to the Nasdaq securities that are not phased-in
under such schedule, until July 28, 1997. In addition, the Commission
is exempting substantial market makers and specialists from compliance
with the 1% requirement of the Quote Rule with respect to non-Rule 19c-
3 securities until July 28, 1997.
FOR FURTHER INFORMATION CONTACT: David Oestreicher, Special Counsel, or
Gail Marshall-Smith, Special Counsel, (202) 942-0158, Division of
Market Regulation, Securities and Exchange Commission, 450 Fifth
Street, N.W., Mail Stop 5-1, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION:
Background
On August 28, 1996, the Securities and Exchange Commission adopted
Rule 11Ac1-4, the Limit Order Display Rule, and amendments to Rule
11Ac1-1, the Quote Rule under the Exchange Act.\1\ The Limit Order
Display Rule requires over-the-counter (``OTC'') market makers and
exchange specialists to publicly display certain customer limit orders.
The ECN Amendment of the Quote Rule requires OTC market makers and
specialists to publicly disseminate the best prices that they enter
into an electronic communications network (``ECN''),\2\ or to comply
indirectly with the ECN Amendment by using an ECN that furnishes the
best market maker and specialist prices therein to the public quotation
system (the ``ECN Display Alternative'') \3\ In addition, the Quote
Rule term ``subject security'' \4\ was amended, thereby requiring OTC
market makers and specialists to publish quotes in any exchange-listed
security if their volume in that security exceeds 1% of the aggregate
volume during the most recent calendar quarter.\5\
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\1\ See Securities Exchange Act Release No. 37619A (September 6,
1996), 61 FR 48290 (September 12, 1996) (``Adopting Release'').
\2\ 17 CFR 240.11Ac1-1(c)(5)(i).
\3\ 17 CFR 240.11Ac1-1(c)(5)(ii).
\4\ 17 CFR 240.11Ac1-1(a)(25).
\5\ 17 CFR 11Ac1-1(c)(1). See Securities Exchange Act Release
No. 38110 (January 2, 1997), 62 FR 1279 (January 9, 1997) which
changed the effective date of the 1% Rule, with respect to the
amended definition of ``subject security'', from January 10, 1997,
to April 10, 1997.
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[[Page 18515]]
Discussion
The obligations under the Order Execution Rules represent a
significant change in the order handling practices of OTC market makers
and specialists. The Commission, therefore, has chosen to require
compliance with the rules over a phased-in period. On January 20, 1997,
the Order Execution Rules became effective and compliance with the
rules became mandatory for all exchange-traded securities and 50 Nasdaq
securities.\6\ Subsequently, the Commission provided exemptive relief
from compliance with the Order Execution Rules for the Nasdaq
securities not phased-in as of February 14, 1997, until April 14,
1997.\7\ To date, compliance is mandatory for all exchange-traded
securities and 150 of the most actively traded Nasdaq securities.
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\6\ See Securities Exchange Act Release Nos. 37619A (September
6, 1996), 37972 (November 22, 1996), 38110 (January 2, 1997), 38139
(January 8, 1997), and 38246 (February 5, 1997) outlining previous
phase-in schedules for the Order Execution Rules. The Commission
notes that a broker-dealer's duty of best execution discussed in the
Adopting Release is applicable to all securities and is not based on
whether or not the security has been phased-in under the Limit Order
Display Rule or the ECN Amendment.
\7\ See Securities Exchange Act Release No. 38246 (February 5,
1997). Absent the granted exemptive relief, the Limit Order Display
Rule would currently apply to 1000 Nasdaq securities with an
additional 1500 Nasdaq securities being required on March 28, 1997.
Moreover, the ECN Amendment would currently apply to 1000 Nasdaq
securities with the remaining Nasdaq securities being required on
March 28, 1997.
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The Commission has been closely monitoring the implementation of
the rules and has found that the implementation appears to be occurring
successfully. The success to date is due, in-part, to affording market
participants time to adapt to the new regulatory requirements.
Moreover, Nasdaq will continue to have capacity limitations that reduce
its ability to handle substantial additional quotation traffic until
mid-July. The NASD has, therefore, requested that the rules be phased-
in on an extended schedule that strikes a reasonable balance between
the desire to enhance the benefits of the Rules for investors and the
need to ensure that implementation of the Rules does not compromise the
integrity or capacity of automated systems operated by Nasdaq, broker-
dealers, ECNs, and vendors.\8\ Accordingly, the Commission believes it
is appropriate to continue the gradual phase-in of both the Limit Order
Display Rule and the ECN Amendment for the next 550 most actively
traded Nasdaq securities. However, once the most actively traded Nasdaq
securities are phased-in, the Commission expects to phase-in the
remaining securities on a more accelerated basis.
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\8\ See letter from J. Patrick Campbell, Executive Vice
President, Trading & Market Services, The Nasdaq Stock Market, Inc.,
to Richard R. Lindsey, Director, Division of Market Regulation,
dated April 8, 1997.
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The new schedule for the next 550 Nasdaq securities is as follows:
50 Nasdaq securities on April 21, 1997; 50 Nasdaq securities on April
28, 1997; 50 Nasdaq securities on May 5, 1997; 50 Nasdaq securities on
May 12, 1997; 50 Nasdaq securities on May 19, 1997; 50 Nasdaq
securities on May 27, 1997; 50 Nasdaq securities on June 2, 1997; 50
Nasdaq securities on June 9, 1997; 50 Nasdaq securities on June 23,
1997; 50 Nasdaq securities on June 30, 1997; and 50 Nasdaq securities
on July 7, 1997.\9\ The Commission will not phase-in securities the
week of June 16, 1997 to afford Nasdaq an opportunity to effect system
upgrades designed to enhance Nasdaq's quote update response time and
the capacity of Nasdaq's last sale broadcast. To accommodate this
schedule and pursuant to Rule 11Ac1-1(d) \10\ of the Exchange Act, the
Commission is exempting responsible brokers and dealers, electronic
communications networks, exchanges, and associations, until July 28,
1997 form the requirements of: (1) Rule 11Ac1-1(c)(5)(i), the ECN
Amendment, with respect to all Nasdaq securities not phased-in as of
July 7, 1997; and (2) from the requirements of Rule 11Ac1-1(c)(1), with
respect to non-Rule 19c-3 securities.\11\ In addition, pursuant to Rule
11Ac1-4(d) \12\ of the Exchange Act, the Commission is exemption
responsible brokers and dealers, electronic communications networks,
exchanges, and associations, until July 28, 1997 from the requirements
of Rule 11Ac1-4, the Limit Order Display Rule, with respect to all
Nasdaq securities not phased-in as of July 7, 1997.
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\9\ Nasdaq will continue to identify the specific securities to
be phased-in prior to each phase-in date.
\10\ 17 CFR 240.11Ac1-1(d).
\11\ See 17 CFR 240.19c-3. Exchange Act Rule 19c-3 prohibits the
application of off-board trading restrictions to securities that (1)
were not traded on an exchange before April 26, 1979; or (2) were
traded on an exchange on April 26, 1979, but ceased to be traded on
an exchange for any period of time thereafter. Accordingly,
exchange-traded securities not subject to off-board trading
restrictions are referred to as Rule 19c-3 securities, and exchange-
traded securities subject to off-board trading restrictions are
referred to as non-rule 19c-3 securities.
\12\ 17 CFR 240.11Ac1-4(d).
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The Commission has granted this exemptive relief to continue
monitoring the operation of the Order Execution Rules, and will
announce a phase-in schedule for the Nasdaq securities not phased-in as
of July 7, 1997 at the appropriate time. The Commission finds that the
exemptive relief provided herein to responsible brokers and dealers,
electronic communications networks, exchanges, and associations is
consistent with the public interest, the protection of investors and
the removal of impediments to and perfection of the mechanism of a
national market system. Moreover, granting exemptive relief from the
requirements of Rule 11Ac1-1(a)(25) until July 28, 1997, will provide
the NASD and the Intermarket Trading System Participants further time
to resolve their existing limitations on the automated generation of
quotations.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30(a)(28) and (61).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-9713 Filed 4-15-97; 8:45 am]
BILLING CODE 8010-01-M
